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Mr. FRELINGHUYSEN. That is not to say, however, that the Federal Government should bail out the States.

Mr. HELLER. But really, my point here is that they are doing their utmost to bail themselves out.

Mr. FRELINGHUYSEN. If they do not raise taxes to cover their expenditures, they are not doing their utmost. In other words, I think Governor Rockefeller at least has the right idea. He is trying to balance the budget at the State level. But I do not have too much sympathyand I know nothing about it, so I should not say this with a State like Michigan that allows itself to get into such financial difficulties. Again it is easy enough for us to talk, because we cannot solve our own problems here, either. But I would assume that we have got to, at some point—unless we are going to pass it all off to the next generation or two generations from now-balance revenues and expenditures. An appropriate place to do that is at the State level.

Mr. THOMPSON. It might be remembered, that in the case of Michigan, in the city of Detroit alone, thanks to the recession, there are 200,000-some unemployed and 67,000 families on surplus food relief.

I for one think that the Federal Government should do something to bail them out in the form of the depressed areas legislation, and I think that it is somewhat tragic that at least part of the Full Employment Act were not invoked during the recession.

It really is not the State's fault. Unhappily, many States have these relatively regressive excise taxes. People out of work do not smoke as many cigarettes, drink as much beer, or bet on as many horses. They therefore find a terrifically critical situation; they find themselves in this terrifically critical situation.

Mr. HELLER. As a matter of fact, the problem that is involved in the recession, the impact on State-local revenues, was underscored in Governor Freeman's budget message with a chart showing the relationship between the growth of State-local purchases of goods and services from the first quarter of 1957 to the third quarter of 1958, when it rose from an index of 100, based at the first quarter, to 111.

In other words, the expenditures rose by 11 percent. The lower line shows the growth of gross national products which is essentially the tax base of all governments, if you will, and it first dropped and then has just recovered toward the end of 1958 to its prerecession level.

This has opened up a great big gap between the rising responsibilities, expenditure responsibilities, of State-local governments, and a tapered-off set of revenues.

I do not really feel that this can be called poor fiscal planning, because, if you look at the forecasts of business activity by Federal officials in mid-1957, you would find no indication of the recession of 1958 on the part of the official economic forecasters, on whom the States had to rely for their estimates of revenue increases.

As a matter of fact, as late as September of 1957, Federal Reserve Boards were still taking restrictive action in the form of tightening credits, to fight inflation.

Mr. FRELINGHUYSEN. I will certainly admit that the State governments have a lot of problems, and they are subject to factors beyond their control, so far as their revenues are concerned. It might be that we should say the States should not any longer have any responsi

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bilities in the field of education because they have got enough to do, anyway, and we will take them all on, but that is an entirely different problem from the one we have been considering, and I do not think you are really raising this point, anyway.

Mr. HELLER. No, indeed, I am not.

Then I do want to go on to say that in Michigan a very bold and courageous revenue program has been proposed to close this gap. A 2- to 6-percent individual income tax and a 5-percent corporate income tax have been proposed by Governor Williams.

In Minnesota, I can speak with painful awareness of what is being proposed: a 30-percent increase in individual income tax, an increase in the corporate income tax, an increase even in the iron-ore tax, and in cigarette taxes, inheritance taxes, and gift taxes.

Strangely enough, Governor Freeman's program has a very close correspondence in its basic approach to Governor Rockefeller's program. I think they are both bold, courageous, and responsible programs. The States are not ducking their responsibilities.

Mr. BRADEMAS. Except in Indiana, the Governor says, “I will not accept the responsibility for any further tax increases."

Mr. HELLER. Yes; there are exceptions to all generalizations, Mr. Brademas. I accept this evidence.

The Pennsylvania Governor, Governor Lawrence, has said he needs $400 million of new taxes. I assume that is for a biennium.

I noticed that Governor Meyner did not have to call for new taxes, but that is partly because he had new taxes last year, the last legislative session. I think the same thing is true in Maryland. It has increased its sales and income taxes by 50 percent in the last couple

California has a $250 million tax program; Ohio, $50 million; Washington, $50 million; Florida, $40 million; and Massachusetts has a very grave problem.

The legislatures of the few States I have mentioned are being confronted with requests for a billion and a half dollars of new taxes. When

you

add in the States that are not covered in the available information, I should say that at least $2 billion of new taxes will be requested by the 49 State legislatures this year.

Coupling that with the property tax increases, I believe it is safe to predict that this will be the greatest single year of tax rate increases at the State and local level in history, in absolute terms.

Perhaps during the great depression, in relative terms, you might have found a year that would exceed it, but in absolute terms, I think it will be the greatest year in history.

Mr. FRELINGHUYSEN. I hope you are not also predicting a raid on the U.S. Treasury, because of these problems.

Mr. HELLER. All I am saying, Mr. Congressman is that this reflects the tremendous pressures on the State and local units. It reflects also an attempt on their part, as best they can, to meet these pressures. In other words, they are not shirking their duties, but the pressures are there.

We can think of the chief among these pressures as "the four P's.” The explosive postwar resurgence of State-local government is primarily a response to the fourfold pressures of population, prosperity, public works backlog, and price inflation.

of years.

First, the sheer force of numbers, the growth of total population by 40 percent from 1946 to 1965 (projected) has immensely increased the demand for local government services. Population imbalance intensifies the problem. The expensive age groups are expanding much faster than the productive age groups. From 1946 to 1965, school-age population (ages 5 to 17) is rising by 78 percent, and the 65-and-over age group is rising by 63 percent. But the most productive age group, the 18 to 64 group, is rising by only 21 percent. In other words, the school-age population is increasing almost twice as fast as the total population and four times as fast as the 18 to 64 age group.

All of the States are faced with this population imbalance. The expensive age groups are increasing a lot faster than the productive age groups that constitute the tax base.

Mr. THOMPSON. Doctor, it being a fact, and thoroughly well accepted, that the State usurps municipal taxing areas and, in turn, the Federal Government has usurped from the States, do you think that a Nation with a gross national product of over $470 billion can afford only a $77 billion budget? Do you think that this $77 billion figure is so sacred ?

Mr. HELLER. Mr. Chairman, I testified last Friday at the invitation of the Joint Economic Committee on this very point, and if I may answer your question by a quotation from that testimony, I should like to do so.

In effect, the statement said that in the present external context which confronts this country, with the possibility of annihilation or humiliation, and in our present internal context, in which most of our affluence is being fritted away (and you will recognize this phrase) in indulgences, luxuries, and frivolities—I would sharply disagree with the position that we need to hold the budget to exactly $77 billion.

The point made in this testimony was that our dangers on the inflationary front are not so great as to require us to have a balance at precisely $77 billion; that if we feel that our country is endangered on the national security front, or if we feel that we need more investment in education, if we feel that we need more foreign aid, these substantive requirements are really more important, really take precedence, it seems to me, over some relatively artificial concepts of budget balancing. The balanced budget has been offered, so to speak, on the altar of price stability. It is the main offering in the interests of price stability called for by the President. We all want price stability, and we all want to prevent inflation, but there is a great deal of slack left in the economy at the present time. To require that on the basis of estimated revenues we rigidly adhere to this particular budget figure it seems to me is the wrong way to approach the question of the Government's responsibilities. We ought first to decide on the national priorities, and their cost to the Federal Government. Then if any resulting deficit be inflationary in character let us increase taxes to meet the deficit.

Mr. THOMPSON. Yet, if we had increased taxes to meet the deficit last year, we would have had a state of chaos.

Mr. HELLER. Absolutely. Last year we should have had, if anything, a tax cut to speed recovery.

Mr. FRELINGHUYSEN. But this year, if we get our budget seriously out of line because of additional demands of perhaps $3 billion, or whatever it is we may come up with, with your basic ceiling we probably should increase taxes because we are not in a period of economic difficulty.

Mr. HELLER. I should say that if we are only $2 or $3 billion off the budget balance mark for fiscal 1960, it will not be so serious a contribution to inflationary pressures, as to call for tax increases.

During the fiscal year 1961, if the economy expands as predicted to the $500 billion level, that deficit would be wiped out.

I am not sure that the Congress should go through the pain of enacting a tax increase for just a 1-year period, so to speak.

Mr. FRELINGHUYSEN. No, it is much less painful for us to have a tax cut, of course, and not worry about the size of the deficit, but that is not really what we are talking about.

We do not have any idea of how big the revenues are going to be. They may be over-optimistic, for all we know.

If we increase spending as well, it may not be just a little $2 or $3 billion deficit.

Mr. HELLER. If the deficit should really become a sizable contribution to our inflation dangers, then I think that the responsible thing to do is to increase tax rates. There is no question about that. But I do not foresee that, in this context of very rapid economic growth in the next 2 years.

Mr. THOMPSON. I do not think that the strongest advocate of this legislation want to, by its enactment, create more inflation. I for one certainly believe that in a stable dollar, there are almost innumerable opportunities on the administrative level to save money. There is not a five-cent piece that I have heard of being saved out of the military where the waste is prodigious.

Tightening of administration and savings therefrom, if these rosy predictions for the future are more accurate than last year's were, I think we can look forward to the enactment of this legislation with some confidence. Last

year the predictions were that the budget would have a $100 million surplus. We ended up with a $12.2 billion deficit.

Mr. HELLER. The current estimate, as a matter of fact, is $12 billion deficit for this fiscal year.

Mr. THOMPSON. That deficit came from the lack of revenues to the Government because of the recession, and relatively little, if any, antiinflationary action was taken. The Full Employment Act was not implemented.

Mr. BRADEMAS. Even the Secretary of the Treasury admitted, I think, before a Senate committee last August, that the chief source of the deficit was the loss of tax revenues occasioned by the business recession, rather than an increase in Federal spending.

The other day I was down at the Treasury Department when they brought new members in for lunch, and we had a little discussion of some of the problems that confronted the Treasury Department. I raised the question as to whether or not these people at the Treasury Department regarded this $77 billion budget as an honest estimate on the part of this administration, or if it were a political decision. I suggested that it was a political decision, and I had no disagreement with that observation.

Mr. HELLER. Were you referring to the expenditures side or the revenue estimating side?

Mr. BRADEMAS. Both sides.

Mr. FRELINGHUYSEN. Mr. Chairman, I hate to interrupt, but I would just like to say that I must leave. I have no alternative. I have found Dr. Heller a very stimulating witness, even though I did not agree with every sentiment he expressed.

Mr. HELLER. Thank you, Mr. Frelinghuysen.

Mr. THOMPSON. Doctor, we have spent so much time interrupting you and discussing matters among ourselves that we are running out of time.

I wonder whether it would be possible for you to summarize the rest of

your statement, and then I will ask unanimous consent that your statement be put in the record, as written.

Mr. HELLER. Yes; I should be happy to do that. (The unread portion of Dr. Heller's statement is as follows:) Second, prosperity generates more demands for new and improved State-local services than revenues to pay for them. As the average family's disposable income (after taxes) rises from $5,300 in 1956 to $7,100 in 1975 (as estimated by the Committee for Economic Development), people are demanding new services and higher levels of existing services from Government. In the 1930's and 1940's, when we were fighting first for economic and then for military survival, only one government–the National Government-could cope with these national crises. But currently and in the foreseeable future, both the pressure of numbers and the pressure of quality will focus primarily on new and improved State and local services: schools, roads, health, parks, sewer systems, smoke abatement, urban redevelopment, and the like.

Third, these pressures are further compounded by the huge backlog of public construction born of depression and war, combined with vast new demands arising from the “flight to the suburbs” and deterioration of the core of our metropolitan centers. Various estimates have placed average annual State-local public construction outlays in the second postwar decade at a level nearly double that of the first. Compilations and estimates made by financial analyst Harry L. Severson, based on the pivot year 1956, dramatically established this point, as follows:

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Note that in relation to the 1956 rate of spending, the average annual rate of construction expenditures in general would rise by nearly three-quarters, and the school construction rate by three-fifths.

Fourth, inflation has hit State-local government disproportionately hard. Such governments are heavy buyers in markets for services and products whose prices have risen especially fast. The so-called price deflators—roughly equivalent to price indexes--for various segments of the economy reflect this pressure. Taking 1947 as 100, the preliminary 1958 deflator for gross national product as a whole was 133; for Federal purchases of goods and services, 146; for new construction, 150; and for State-local purchases, the highest figure of all, 162. Even between 1954 and 1958, when the consumer price index increased only 8 percent, the price per unit of goods and services purchased by State-local governments rose 16 percent.

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